Facing a shifting regulatory landscape, sales of non-traded REITs and business development companies look to be off about 50 percent this year.

For the same reason, sales are shifting to lower-cost share classes.
Through August, sales of non-traded REITs were $3.15 billion, down 55 percent from the same period a year ago, according to the Robert A. Stanger & Co., which tracks the industry.
Sales of BDCs through August were $1.07 billion, down 62 percent.
Non-traded REITs, the bigger category, should reach around $5 billion this year -- about half of last year -- said Keith Allaire, managing director at Stanger.
“That’s primarily due to the change from full front-load structure, to a trail commission structure,” he said. “It’s a matter of getting new products in the pipeline, and at B-Ds trying to figure what structure they want on the platform.”
Of the more than $3 billion raised by REIT sponsors so far this year, 54 percent was in low or no-load products, Allaire said. That’s a marked change from the same time last year, when just 7 percent of sales went to lower-cost products.
A Finra rule that went into effect in April 2016 that requires that estimated per-share values for non-traded products be shown on account statements has been a major impetus behind the switch.
The pending DOL rule has also had an impact. It will put the onus on brokerage firms to ensure that commissions are reasonable, and require extra care in selling any high-commission, illiquid or complex product.
“This is really the year of adjustment,” Allaire said about the shift to lower-cost share classes. “It accounts for the decline in sales.”
The most common new share class for non-traded programs, T shares, typically pay registered reps about 3 percent upfront with a 1 percent trail. Institutional share classes have no commissions or trails, and are designed for advisory accounts, Allaire said.
In some of the T share offerings, total fees are capped at less than 10 percent, which has been the industry standard for decades, he added.
Whether the new pricing will be enough to attract sales from commission-based reps is unknown. Any kind of upfront-commission product could be less attractive with the more transparent pricing. Advisors may gravitate to publicly traded REITs instead, which critics of the non-traded variety say have outperformed their illiquid cousins.
Additionally, some non-traded product sponsors are using closed-end interval funds, which have mutual-fund-like pricing, daily NAVs and limited quarterly liquidity.
A notable player, Griffin Capital Corp., said this month that its Griffin Institutional Access Real Estate Fund, an interval product launched in June 2014, had exceeded the $1 billion-in-assets milestone.
The fund “has an institutional cachet to it,” Allaire said, as well as a dedicated a sales force.
Randy Anderson, portfolio manager of the Griffin fund, expects to see more interval funds.
“There are quite a few in the registration process,” Anderson said. “Most of the main sponsors are doing something.”
The pending lineup of interval products will invest in real estate as well as other asset classes, he said.
Regulatory changes are driving some of the shift, but “it’s also being driven by broad investor mandate” for more liquidity and transparency, Anderson said.
“We’ll even see the use of open-end fund products out there as well,” he added.